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By Leila Lajevardi • July 18, 2018

Economy Still Growing!

The current levels of economic growth are the second longest in history and if continued, will be the longest in history. Goldman Sach’s economic research cites that the popular opinion that a recession is expected in 2020 is  rather impulsive. GS writes, “We do expect a passive fiscal tightening, tighter financial conditions, and supply constraints to leave growth ½pp below potential in 2020 at 1.25%. This implies greater risk of at least a technical recession in 2020, but it is not our base case.”

Concern looms following the recent imposition of stricter regulations and tariffs on trade and foreign goods. GS remains skeptical that these regulations alone will deter any foreign investment, “Academic research finds some evidence of trade policy uncertainty effects, but it is not clear that they are meaningful at a macroeconomic level. We find that while the overall Economic Policy Uncertainty Index—which is not currently elevated—adds predictive information to a standard model of aggregate investment growth, its trade policy component—which is quite elevated—does not.” This data further insists that even a trade war would have only a modest direct economic impact. The impact however would have a greater effect on equity markets.

This Goldman Sach’s report additionally disputes that any looming recession may be accredited to historical causes of recession, which previously had been recognized to be overheating and financial excess. These risks look limited for now.  

Now for some bad news- the output gap and unemployment rate do not look as promising when examining the end of US expansion. While the unemployment rate continues to drop, “For the expansion to continue for many years, the Fed will first need to stabilize the unemployment rate and eventually to nudge it somewhat higher without setting off a recession.” This is not impossible, but has yet to have been achieved.


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